The economies of large dams – Why Karuma $1.4 Billion loan is a bad idea
The 48 countries of Sub-Saharan Africa (with a combined population of 800 million) generate roughly the same amount of power as Spain (with a population of 45 million). African governments have quickly paid attention to the fact that their power infrastructure delivers only a fraction of the service found elsewhere in the developing world. Across the continent several major energy infrastructural projects are in the works, one of them being the Karuma dam in Uganda.
On Wednesday 25th March the Ugandan Parliament approved a USD 1.435 billion (UGX 4.289 trillion) loan from the Export–Import (EXIM) Bank of China to finance the construction of Karuma Hydropower Plant, close to a year and half after the Ugandan government initiated a process to borrow money for the construction of Karuma dam – a 600 megawatt hydropower plant. When completed, it will be the largest power-generating installation in the country.
Under the financing deal the Chinese government would raise 85% of the project cost as a loan extended to Uganda through the Exim Bank. Of the USD 1.435 billion, USD 789.3 million will be loaned at 2% per annum, repayable over 20 years, while USD 645.82 million will attract 4% interest, payable over 15 years. The clock starts ticking on the day the dam is fully commissioned.
This project comes after a 2013 research study by Oxford University titled “Should we build more large dams? The actual costs of hydropower megaproject development”. The peer review study that was conducted over a space of four years analyzed all large dams across the world built between 1934 and 2007 for which reliable costs and schedule figures are available – 245 projects in 65 countries with a total cost of USD 353 billion (in 2010 prices) thus forming the most comprehensive economic analysis of large dams ever undertaken.
The scientific study offers an unflattering verdict on the economics of large dams, with important implications for future energy sector planning projects showing that large dams suffered average cost overruns of 96% with the degree of cost overruns tending to increase with the size of projects, implying that on average large hydro power dams do not make economic sense.
It added that implementations suffer an average delay of 44% and this does not include the lengthy lead time required to prepare projects of this nature before concluding that dam planners needed to increase cost estimates by 99% & schedules by 66% to achieve 80% within the planned budgets and timeframes.
True to this, Bujagali Energy Limited (BEL), the company that built the Bujagali dam started out with a USD 580 million budget, but by the end of the project in 2012, the cost had shot up by 48%.
While dam builders and financiers have acknowledged the problem and claim they have learned from their mistakes, the study also shows that this is not the case. Going by its findings, forecasts of costs of hydro power dams being made today are likely to be as wrong as they were between 1934 & 2007.
If any consideration is made for the study, it would require the Museveni administration to rethink, redraw and refinance its biggest and most expensive energy infrastructure project to-date. Given that the government has already taken significant steps towards Karuma, it will proceed with its preparations as planned but it’s also likely to return to parliament asking for more like Oliver Twist and his bowl.